Economic Outlook: Despite talk of an ongoing recovery, many analysts expect to see only small improvements throughout 2012.

By DeAnna Stephens BakerDate Posted: 4/1/2012

Analysts have spent the beginning of 2012 looking at trends and data from previous years, trying to predict how the economy will perform throughout the rest of this year. Like most industries, the pallet and wood products markets have some bright spots on the horizon, yet many unknowns exist as well.

While there are several ideas on how the specifics of the global economic situation will play out through the rest of the year, most analysts agree that there will be some improvements although these will be limited and slow throughout 2012.

U.S. Economic Growth

The overall U.S. economy is expected to grow only slightly faster in 2012 than it did last year. The highest projections place economic growth at 3%. But most keep it down closer to the 2 to 2.3% growth forecasted by The Kiplinger Letter, which is not fast enough to significantly lower the unemployment rate.

“Unfortunately, growth isn’t accelerating as it normally does in a recovery,” Kiplinger reported. “The economy grew at an annual rate of 3% in the last quarter of 2011, but the pace will slow again early in 2012 and pick up only slightly by the end of the year. A sustained recovery still is not under way, more than two years after the end of the Great Recession.”

Despite many analysts saying that a long-term recovery is not yet in the works, there is still a lot of optimistic talk of a recovery.

“Currently, there is an upbeat mood in the media about ‘recovery,’” said Chuck Ray, associate professor of wood operations at Pennsylvania State University. “But optimism seems to be based on higher numbers in retail spending and the stock market, not on durable goods.”

The Congressional Budget Office (CBO) forecast that the economy will continue to recover slowly, with real GDP growing by 2% this year and 1% next year, partly due to higher tax rates and scheduled spending curbs. The CBO also stated that it “expects economic activity to quicken after 2013 but to remain below the economy’s potential until 2018.” As a result of continued weakness in demand for goods and services, the CBO predicted that the unemployment rate will remain above 8% through 2013.

“As economic growth picks up after 2013, the unemployment rate will gradually decline to around 7% by the end of 2015, before dropping to near 5.5% by the end of 2017,” the CBO’s forecast estimated.

Some analysts have been a bit more hopeful in their projections, with predictions of the unemployment rate dropping as low as 6.5% by the end of next year. However, most seem to expect it to remain closer to the 8% mark until 2014 at the earliest.

Global Issues

Unfortunately, the United States is not the only economy trying to recover. Ray described the world economies and industries as being “in consolidation mode, as governments struggle to prop each other up.” And the U.S. economy is in a tenuous position, with little to cushion it from any of the many potential shocks. Kiplinger’s analysts warn that war, an oil price spike, terrorism or a natural disaster could all easily send the U.S. into another recession.

Several ongoing issues around the globe will also have an impact on the U.S. economy, either positive or negative, depending on how they play out. The debt crisis in Europe has already slowed U.S. exports to the region. Europe appears to be heading into another mild recession this year. Some analysts are concerned that it could start causing larger financial problems for the United States.

“While strains in financial markets have been limited to European institutions so far, we must continue to monitor events to ensure that there are no adverse spillovers to U.S. financial institutions,” said Charles Plosser, president and CEO of the Philadelphia Federal Reserve. “Of course, regardless of how the European situation plays out, it has already imposed considerable uncertainty on growth prospects for the global economy. Moreover, our own nation’s inability to establish a clear plan to put our fiscal house in order contributes additional uncertainty to the economic landscape.”

In China, the economy is struggling as the real estate bubble has burst, inflationary pressures are mounting and the credit crisis is rising. What happens in China is of greater importance than ever due to the amount of logs and lumber exported there last year from the United States, especially West Coast mills and logging operations. During 2011, China became the world’s largest importer of logs and lumber, and the largest importer of logs and lumber from the West Coast. U.S. log exports to China totaled 46% of all U.S. log exports in 2011. Lumber exports were 30% of the total U.S. lumber exports for the year. Surging demand from China has helped maintain the North American timber industry throughout 2011 as the domestic housing market continued to flounder.

Some, such as Marshall Thomas, president of F&W Forestry Services, Inc., a forest resource management and consulting firm, believe that log and lumber exports to China and other Far Eastern countries may even help boost the southern pine industry. Thomas believes U.S. East Coast ports, especially those in the Southeast that have immediate access to the southern pine belt, will likely share in the Far East export surge when expansion of the Panama Canal is completed in 2014, making those ports accessible to the super large container ships soon to travel global ocean trade routes.

And despite the decline in log and lumber imports seen this past fall, due to a high inventory in the country and an attempt by the Chinese government to control inflation by limiting the amount of money available for the real estate sector, many believe that China’s economy is still growing, simply at a slowing rate. However, there is still some concern over the future reliability of the demand.

“The volatility is adding a new element of uncertainty to the wood products industry, and raising questions over whether the country will be a dependable customer,” said Bruce Glass, forest economist with the Campbell Group.

There has also been concern that Russia may try to take back its former position as the top exporter of logs to China, which it has lost since its 2008 implementation of a log export tariff of 25%. Russia’s log export tariffs are set to be reduced as the country becomes a member of the World Trade Organization (WTO). However, Russia taking back its top spot in China is not likely to happen, according to the Wood Resource Quarterly (WRQ), which stated the proposed new lower tariffs are not expected to increase Russian export volumes to pre-tariff levels.

“It is not likely that foreign log buyers will rush back to Russia to purchase higher log volumes in the coming years since the business climate in the country continues to be challenging in terms of political uncertainty, continued corruption, increasing domestic log costs and infrastructure problems,” explained WRQ. “This uncertainty makes many forest companies wary about investing or trading with Russia, so they will likely try to diversify their timber sourcing further to include other regions.”

Housing Market

Projections for the housing market are a mixed bag. Some analysts are slightly more hopeful than many others. Yet many experts do not think that a meaningful housing recovery will appear for several more years.

Delton Alderman, a researcher at the Forest Service’s Forestry Sciences Laboratory, and Urs Buehlmann, a professor with the Department of Sustainable Biomaterials at Virginia Tech, said that new housing starts are showing signs of life, but that there is still a long way to go.

Housing starts saw only a small increase in January, driven by multi-family starts which are still volatile. Single-family starts actually decreased from December to January, to a total of 508,000 starts, lower than the December estimate of 513,000. This was an increase of 16.2% from January 2011. But unfortunately this is not enough of an increase to keep it from being the fourth consecutive year of historically low housing start levels. This indicates that thereis still no relief in sight from the housing market for hardwood and softwood sales.

Alderman and Buehlmann characterized existing home sales as still “muddling along.” On the positive side, they said the quantity of available existing homes is declining, and is at its lowest number since 2005. However, they also noted that existing home prices are still declining year-over-year and that private investors are the main purchasers of foreclosures, and existing and new home sales.

Deterrents to a real housing recovery include increasing federal and personal debt, student loan debt and of course the multiple global financial issues. However, Alderman and Buehlmann suggested that the most important factor is the job market.

“Until there is a substantial recovery in job creation and calling laid-offemployees back to work, housing probably will remain in the doldrums,” they said.

The National Association of Home Builders (NAHB) has been more positive in itsoutlook on the housing market. Barry Rutenberg, NAHB chairman noted that outside of the upwardly revised December numbers, January’s sales pace was the best seen since April of 2010, when the home buyer tax credit was in effect.

“Moreover, many recent indicators – from our builder confidence surveys to housing starts and permits data and the expanding list of improving local markets– have provided evidence that consumers are becoming more confident about making a home purchase,” said Rutenberg.

NAHB’s chief economist David Crowe said that January’snew-home sales, which were up 3.5% from the same time last year, and up one percent from the fourth quarter average for 2011 were “indicative of the incremental, steady progress that the market is making toward recovery in conjunction with modest economic and job growth. Increasingly, potential buyers are feeling better about their financial situation and their ability to buy a home, but the challenges posed by tight credit conditions and appraisal issues continue to slow that process.”

Looking further ahead, Plosser of the Philadelphia Federal Reserve, warns that even when the economy stabilizes, we should not expect the housing and related sectors to return to their pre-recession highs. “Those highs were unsustainable, and the housing crash that ensued destroyed a great deal of wealth for consumers and the economy as a whole,” he said.

Unfortunately, all of this means that the forest products industry will still be in a “wait and see” mode during the coming months. Right now, the economy is recovering, but at a much slower pace than hoped for. Though the housing market is still stuck in low gear, Chinese and other international demand is expected to keep the industry afloat for now.

“Canadian and U.S. timber and lumber prices are continuing to be propped up by Chinese demand,” said Ray. “Barring ‘seismic’ events, lumber prices will remain fairly stable.”

As long as nothing catastrophic happens, such as inflation causing the Chinese economy to flatten, a collapse of European banks, an oil price spike, or a natural disaster, the U.S. forest products industry should pull through 2012.